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Is there too much saving in the world?

John Redwood, Charles Stanley’s Chief Global Economist, looks at the glut of cash being held around the world.

byJohn Redwood

in Features

18.04.2019

The Bank of England has drawn attention to the world glut of savings. In many advanced countries ageing societies have put aside substantial sums for their retirement. Unfortunately for them, as they do so the rate of interest they receive has fallen, leading them to need or want to save more. In the UK pension funds are valued in relation to the official interest rate on government bonds. As the rate falls so the amount of money the fund needs to pays the pension rises. This accounting method has led to huge requirements for top ups in many pension funds. In Japan, with a more extreme problem of both ageing and low interest rates, elderly people felt they need even more saving to get them by.

The long-term real rate of interest was above 5% at the start of the 1980s. It was typically around 3% in the 1990s, and down to 2% or so in the first years of the present century. It fell away drastically after the banking crash of 2007-9, going below zero. The Bank of England attributes this both to the impact of many savers for retirement, and to the extraordinary monetary policies followed by the central banks of the US, Euro area, Japan and the UK in recent years. Despite substantial government borrowing in 2013, 2015 and 2016 the Central Banks bought up more government bonds than the government issued. This deliberately left markets short of bonds for savers to buy, bidding up the prices and therefore lowering the interest rate on them at the purchase price. The long and substantial quantitative easing programmes of the central banks also kept yields low and bond prices high in the other years of this decade.

This has left central banks worrying about how they respond to any future downturn or crash. The US enquiry into monetary policy is worrying over what the US could do if it has another recession before interest rates have recovered further. They see the difficulty of cutting interest rates enough to provide an offset to the downturn. They have a concept of the “effective lower bound” policy rate, meaning there are limits to how far into negative territory they think they can take interest rates. They do not explain why they have this fear, but have decided to study other options should this issue arise. They could of course undertake more money creation and bond buying. They could take interest rates even lower, or they could directly inject newly created money into the economy.

The Bank of England says it sees the argument for running the UK economy closer to full capacity given the different outlook on inflation, but has not come up with a clear answer of how to tackle the prospect of a downturn if you start from very low interest rates. The Japanese have been here for longer, and they just continue to undertake very large quantitative easing programmes, and keep interest rates around zero. With an ageing population, access to traded goods and services worldwide, and damaged commercial banks this does not generate any inflation.

The result of all this policy discussion is the need for investors to live in a world of ultra-low interest rates and negative real returns on government bonds. The monetary reviews are not about the change this. The US will hold open meetings in the second quarter of 2019 and then spend the following six months trying to come to conclusions. Meanwhile investors who want some real return have to accept more risk, buying shares rather than government bonds. The glut of savings continues. Governments could decide to borrow more in ways which required them to offer more interest on their debts, but so far rates stay low. Central banks are increasingly nervous about letting them rise as they all have a requirement to keep growth edging ahead.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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